MERCHANT BANKING

GROUP MEMBERS

DIVYA NAIR DIANA D SOUZA AARATI HARIA NIRIKSHA SOMPURA SUNITA SINGH SHWETA SHETTY

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MERCHANT BANKING

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INTRODUCTION: The term Merchant Banking is used differently in different countries and so there is no precise definition for it. In London, merchant banker refers to those who are members of British Merchant Banking and Securities House Association who carry on consultation, leasing, portfolio services, asset management, euro credit, loan syndication, etc. in America, merchant banking is concerned with mobilizing savings of people and directing the funds of business enterprises. DEFINITION: There is no universal definition for merchant banking. It assumes diverse functions in different countries. So merchant banking may be defined as,¶ an institution which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counselling, insurance, etc. The Notification of the Ministry of Finance defines a merchant banker as, ³any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing the securities as manager, consultant, adviser, or rendering corporate advisory services in relation to such issue management. ORIGIN: Merchant Banking originated through the entering of London merchants in financing foreign trade through acceptance of bill. Later the merchants assisted the government of under developed countries in raising long-term funds through flotation of bonds in London money market. Over a period, they extended their activities to domestic business of syndication of long-term and short-term finance, underwriting of new issues, acting as
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debenture trustees. MERCHANT BANKING Page 4 . The merchant banking gained prominence during 1983-84 due to new issue boom. MERCHANT BANKING IN INDIA: In India prior to the enactment of Indian Companies Act. The Banking Commission in its report in 1972 recommended the setting up of merchant banking institutions by commercial banks and financial institutions. The merchant banking services were started by foreign banks. negotiating agents for mergers. Hong Kong. portfolio managers. takeover. 1956. Punjab National Bank and UCO Bank. evaluated project reports. the Banking Regulations Act was amended permitting commercial banks to offer a wide range of financial services through the subsidiary rule. Dubai. managing agents acted as issue houses for securities. Bank of Baroda. etc. the post war period witnessed the rapid growth of Merchant Banking through the innovative instruments like Euro Dollar and the growth of various financial centers like Singapore. The need for specialized merchant banking service was felt in India with the rapid growth in the number and size of issues made in the primary market. To begin with. The State Bank of India was the first Indian Bank to set-up Merchant Banking Division followed by Bank of India. Canara Bank. Few share broking firms also functioned as merchant bankers. Baharian. merchant banking services were offered along with other traditional banking services. In the mid-eighties. This marked the beginning of specialized merchant banking in India. Kuwait. planned capital structure and to some extent provided venture capital for new firms. etc.registrars and share transfer agents. namely the National Grindlays Bank in 1967 and the City Bank in 1970.

underwriting and supporting public issues in new issue market and acting as brokers and advisors on portfolio management in stock exchange. The merchant bankers are management oriented. The corporate sector enterprises.. 2. Commercial banks basically deal in debt and debt related finance and their activities are appropriately arrayed around credit proposals. managing. amalgamations. 3. Commercial banks are asset oriented and their lending decisions are based on detailed credit analysis of loan proposals and the value of security differed against loans. Commercial banks are merely financers. credit appraisals and loan sanctions. The activities of merchant bankers include project counselling. Merchant banking activities have impact on growth. the area of activity of merchant bankers is µequity and equity related finance¶. They are willing to accept risks of business.MERCHANT BANKS AND COMMERCIAL BANKS: There are differences in approach. mergers. takeover. They deal with mainly funds raised through money market and capital market. The differences between merchant banks and commercial banks are summarized below: 1. meet MERCHANT BANKING Page 5 . stability and liquidity of money markets. corporate counseling in areas of capital restructuring. etc. therefore. SERVICES OF MERCHANT BANKS: The financial institutions in India could not meet the demand for long-term funds required by the ever expanding industry and trade. attitude and areas of operations between commercial banks and merchant banks. They generally avoid risks. On the other hand.

It is provided to a corporate unit with a view to ensure better performance. working capital. Project reports are prepared to obtain government approval. The merchant bankers also advise the investors regarding incentives available in the form of tax reliefs and other statutory obligations. MERCHANT BANKING Page 6 . fixed deposit. project management. regulations and norms prescribed by the government or followed by financial institutions. maintain steady growth and create better image among investors. Project Counselling: Project Counselling includes preparation of project reports. loan syndication. promoters bank upon merchant bankers who manage the whole show by rendering multifarious services. Corporate Counselling: Corporate Counselling covers the entire field of merchant banking activities viz. The services of merchant bankers are described in detail in the following section: 1. acceptance credit. lease financing. the scope of corporate counseling is limited to giving suggestions and opinions to the client and help taking actions to solve their problems. as to the location. public issue management. project counseling.their requirements through issue of shares and debentures in the capital market. 2. To raise money from capital market. capital restructuring. get financial assistance from institutions and plan for public issue. deciding upon the financing pattern to finance the cost of the project and appraising project report with the financial institutions or banks. The financing mix is to be decided keeping in view the rules. The projects are appraised. etc.

The Merchant bankers involvement enables the company to state that it has exercised due diligence in the exercise of obligations under various regulations. The Merchant banker has to ensure that the project adheres to the guidelines for financing industrial projects. 3. commercial. Merchant banks help clients approach financial institutions for term loans. The next step is designing capital structure. and arriving at a figure of approximate amount of term loan to be raised. Such loans may be obtained from a single development finance institution or a syndicate or consortium. If the financial institution agrees to consider the proposal the application is filled in and submitted along with other documents. Merchant bankers help corporate clients to raise syndicated loans from commercial banks. The Merchant bankers first make an appraisal to satisfy that it is viable. determining the promoter¶s contribution. Loan Syndication: Loan Syndication refers to assistance rendered by merchant banks to get mainly term loans for projects. a preliminary meeting is fixed with financial institution. The decision as to which financial institution should be approached depends on industry. MERCHANT BANKING Page 7 .technical. financial viability of the project. location of the unit and size of project cost. Project Counselling also includes filling up of application forms with relevant information for obtaining funds from financial institutions. After verification that the project would be eligible for term loan.

SFC. debentures or bonds by offering them to public. The pre issue management is divided into: (i) Issue through prospectus. They have to MERCHANT BANKING Page 8 . UTI. (ii) Marketing and underwriting. To bring out a public issue. The issue function may be broadly classified into preissue management and post issue management. etc. Merchant bankers have to coordinate the activities relating to issue with different government and public bodies. preference shares. The investors include LIC.4. (c) The direct sale of securities by a company to investors is called private placement. GIC. that is. legal requirements have to be complied with and several activities connected with the issue have to be co-ordinated. (iii) Pricing of issues. Issue Management: Management of issue involves marketing of corporate securities. professionals and private agencies. offer for sale and private placement. a. The company sells the entire issue of shares or debentures to the issue house at an agreed price which is generally below the par value. (b) Offers for sale are offers through the intermediary of issue house or firm of stock broker. Merchant banks act as intermediaries whose job is to transfer capital from those who own it to those who need it. equity shares. Public Issue through Prospectus: (a) The most common method of public issue is through prospectus. In both the stages.

etc. Members¶ of stock exchange are appointed as brokers to issue.. T. determining the size and publication in which the advertisement should appear. announcement. the merchant bankers help choosing the media.ensure that the information required by the Companies ACT and SEBI are furnished in the prospectus and get it vetted by a reputed solicitor. b. legal advisors. and solicitor. investor conference. the Merchant bankers arrange a meeting with company representatives and advertising agents to finalize arrangements relating to date of opening and closing of issue.V. The copies of consent of experts. brokers and underwriters are to be obtained from the company making the issue to be filed along with prospectus to the Registrar of Companies. Bankers to issue accept application alongwith subscriptions tendered at their designated branches and forward them to the Registrar. Marketing: After dispatch of prospectus to SEBI. radio. registration of prospectus. Publicity campaign covers the preparation of all publicity material and brochures. advertisement in the press. Brokers to the Issue canvass subscription by mailing the literature to the clients and undertaking wide publicity. MERCHANT BANKING Page 9 . attorney. prospectus. launching publicity campaign and fixing date of board meeting to approve and sign prospectus and pas the necessary resolutions. bankers to the issue.

The underwriting arrangement should be filed with the stock exchange. The execution of the activities with clock work efficiency would lead to a successful issue. 3) Pricing of Issues The SEBI guidelines 1992 for capital issues have opened the capital market to free pricing of issues. branches of brokers to the issue and underwriters on time. checking accuracy of statements made and ensure that the size of the application form and prospectus confirmed to the standard prescribed by the stock exchange. Pricing of issues is done by companies themselves in consultation with the merchant bankers. Particulars of underwriting arrangement should be mentioned in the prospectus. The various activities connected with pre-issue management are a time bound programme which has to be promptly attended to. Security issues are underwritten to ensure that incase of undersubscription the issues are taken up by the underwriters.The merchant bankers role is limited to deciding the number of copies to be printed. Pricing of the issue is part of pre-issue management. The merchant banker has to ensure that the material is delivered to the stock exchange atleast 21 days before the issue opens and to brokers to the issue. SEBI has made underwriting mandatory for issues to the public. An existing listed company and a new company set by an existing company with a five year track record and existing private closely held company and existing unlisted company going in for public issues for the first time with a two and a half years track record MERCHANT BANKING Page 10 .

Justification of price has to be stated and included in the prospectus. Registrars have to ensure that the applications are processed and the allotment/refund orders are sent within 70 days of the closure of the issue. verify them and submit the basis of allotment to the stock exchange. The time limit of 70 days has proved difficult to adhere and applicants have to wait for anytime between 90 to 180 days. 5) Underwriting of Public Issue Underwriting is a guarantee given by the underwriter that in the event of under subscription the amount underwritten would be subscribed by him. the auditor/company secretary has to certify that the allotment has been made by the company as per the basis of allotment approved by the exchange. mailing of allotment letters. share certificates and refund orders. It is insurance to the company which proposes to make public offer against risk of under subscription. The issues backed by well known underwriters generally receive a higher premium from the public. MERCHANT BANKING Page 11 . The premium has to be decided after taking into account net asset value. Registrars to the issue play a major role in post issue management. This enables the issuing company to sell the securities quickly. They receive the applications. deciding allotment procedure. profit earning capacity and market price. After the basis of allotment is approved by the stock exchange and allotted by the Board. Merchant bankers assist the company by co-ordinating the above activities.of constant profitability can freely price the issue. 4) Post Issue Management The post issue management consists of collection of application forms and statement of amount received from bankers screening applications.

not more than two merchant bankers should be associated as lead managers. This criteria is applicable to brokers also. appointment of Registrars for dealing with share applications and transfer and listing of shares of the company on the stock exchange. SEBI guidelines insist that all issues should be managed by at least one authorised merchant banker. 7) Portfolio Management Portfolio refers to investment in different kinds of securities such as shares. II. 6) Managers. Banks/ Merchant banker subsidiaries cannot underwrite more than 15% of any issue. 1956. In an issue of over Rs.All public issues have to be fully underwritten. upto a maximum of four merchant bankers could be associated as managers. Only category I. 100 crores. Ordinarily. the merchant bankers make raising money from external resources easy. advisors and consultants to a public issue. It is not merely a collection of unrelated assets but a carefully blended asset MERCHANT BANKING Page 12 . Lead managers have to underwrite mandatorily 5% of the issue or 2. By ensuring a direct in the underwriting. and III merchant bankers are permitted to underwrite an issue subject to the limit that the outstanding commitments of any such individual merchant banker at any point of time do not exceed five times of his net worth (paid-up and free reserves excluding revaluation reserves). debentures or bands issued by different companies and securities issued by the Government. Consultants or Advisors to the issue The managers to the issue assist in drafting the prospectus. application forms and completion of formalities under the Companies Act. Companies are free to appoint one or more agencies as managers to the issue.5 lakhs whichever is less.

. By establishing portfolio management centers at various areas more investments can be augmented from villages.combination within a unified framework. They have to conduct regular market and economic surveys to know. liquidity and profitability of his investment. They need expert guidance. y Financial statements of various corporate sectors in which the investments have to be made by the investors. The portfolio manager generally will have to classify the investors based on capacity and risk they can take and arrange appropriate investment. The portfolio management service is very important need of the day since 1/8 of our investment at present comes from rural areas. the investor is very prudent. Merchant bankers have a role to play in this regard. i. there is an immediate need to MERCHANT BANKING Page 13 . only 1/8 of the savings is mobilised from the rural areas. Even though there are 23 stock exchanges in our country. But investors cannot study and choose the appropriate securities. Every investor is interested in safety. y Monetary and fiscal policies of the government. y Secondary market position. Portfolio management refers to maintaining proper combination of securities in a manner that the give maximum returns with minimum risks. The merchant bankers have to analyse and help the prospective investors in choosing the shares. y Changing pattern of the industry. how the share market is moving. y The competition faced by the industry with similar type of industries. Merchant bankers provide portfolio management service to their clients. Thus portfolio management plans successful investments for investors.e. Today.000 branches. 28 nationalised banks with network of about 50. Instead of concentrating on large investors.

By this service to NRI account holders. A takeover is a purchase by one company acquiring controlling interest in the share capital of another existing company. The non-residents themselves will have to follow many rules and regulations which are complicated. He MERCHANT BANKING Page 14 . In order to ultilise this opportunity the Government is offering number of facilities and incentives. Once the merger partner is proposed. 8) Advisory services Relating to Mergers and Takeovers A merger is a combination of two or more companies into a single company where no one survives and others lose their corporate existence. merchant bankers can mobilise more resources for the corporate sector. This is due to the NRI A/cs being scattered with various branches of banks throughout the country and no institution is taking action to pool these resources. In this regard merchant bankers should help the NRIs in selecting the right type of securities and offering expert guidance in fulfilling government regulations. But the NRI investment is not showing any signs of substantial improvement for corporate sector.develop small investors which could be done through portfolio management. The role which can be played by non-residential Indians in economic development of a country is not small. the merchant banker appraises the merger/takeover proposal with respect to the financial viability and technical feasibility. Merchant bankers are the middlemen in setting negotiations between the company which makes the offer and the company to whom the offer is made to. Being professional experts they are apt to safeguard the interest of the shareholders in both the companies. With their technical skill and foreign exchange and also with their knowledge of foreign market they can contribute much for the country. He negotiates purchase considerations and mode of payment.

10) Non-Residential Investments The services of merchant bankers include investment advisory services to NRIs in terms of identification of investment opportunities. negotiations and compliance with procedural and legal aspects. 9) Offshore Finance The merchant bankers help their clients in the following areas involving foreign currency. drafts scheme of amalgamation and obtains approval from financial institutions.gets approval from the government/Reserve Bank of India. The bankers render other financial services such as appraisal. They also take care of the operational details like purchase and sale of securities. (a) (b) (c) (d) Long term foreign currency loans. selection of securities. Only in the case of right issues not exceeding Rs. 50 lakhs such an obligation is not necessary. MERCHANT BANKERS AS LEAD MANAGERS As SEBI guidelines it is mandatory that all public issues should be managed by merchant bankers in the capacity of lead managers. securing necessary clearance from RBI for repatriation of interest and dividend. Foreign collaboration arrangements. The number of lead managers to be appointed by a company depends upon the size of the issue as shown below: MERCHANT BANKING Page 15 . Joint venture abroad. investment management. Financing exports and imports. etc.

Size of the issue 1 2 3 4 5 Less than Rs. As lead managers. 200 crores to Rs. 100 crores to Rs. One merchant banker cannot have association with another merchant banker who does not hold a certificate of registration with the SEBI. 50 crores to Rs. liabilities. 4. 2. they have to exercise reasonable care and diligence in issue management by paying attention to the following : 1. 400 crores Above Rs. 100 crores Rs. A lead manager is under an obligation to accept a minimum underwriting obligation of 5 per cent of the total MERCHANT BANKING Page 16 .No. It is the duty of every lead managers to enter into an agreement with the issuing companies stating the details regarding their responsibilities. functions.S. 5. mutual rights. 50 crores Rs. 3. In case there are more than one lead managers to an issue. 400 crores Maximum number of lead managers 2 3 4 5 5 or more as prescribed by SEBI Duties and Responsibilities of Lead Managers The most important aspect of merchant banking business is to function as lead managers to the issues management. 200 crores Rs. A copy of this agreement should be submitted to the SEBI at least one month before the opening of the issue for subcription. disclosures. refund. the responsibilities of each of item should be clearly defined in the agreement. allotment etc. Similarly a lead manager cannot undertake the work of issue management if the issuing company is its associate.

QUALITIES REQUIRED OF MERCHANT BANKERS Merchant bankers play a significant role as a catalyst to transform the project ideas into industrial ventures. In the case of development. In case of any suggestions or modifications given by the SEBI. the lead manager has to ensure the collection of the specification amount from the underwriters. 8. the disclosures are true. 11. They help promotion of the enterprise by undertaking various activities such as market surveys. A lead manager has to exercise due care and diligence in the verification of prospectus or letter of offer. to the SEBI at least two weeks before the date of filing with the Registrar of Companies or regional stock exchanges or both. fair and adequate and all legal requirements connected with the issue have been duly complied with. Of course it must be duly intimated to the SEBI. Every lead manager is responsible for ensuring timely refund of excess application money received from the applicants. choice of suitable location and its size. He has to submit due diligence certificate rating that the prospectus or letter of offer is in conformity with the documents relevant to the issue.underwriting commission or Rs. 9. draft prospectus or letter of offer etc. 25 lakhs whichever is less. Every lead manager has to submit all the particular of an issue. 12. he has to ensure that they are properly incorporated in the appropriate areas. 7. It is his duty to mail the share/debenture certificate immediately on allotment or inform it to depository participant. If he is not able to comply with the above provision it is his duty to make managements with another merchant banker associated with that issue to underwrite the said amount. 10. preparation of documents and obtaining consent from MERCHANT BANKING Page 17 . 6.

Knowledge about the various aspects of capital markets. Ability to analyse various aspects such as technical. 4. They help in taking important decisions such as financing mix. financial and economic aspects concerning the formation of an industrial project. change in the economic and technological environment in the country.various authorities. Integrity and maintenance of high professional standards are the essential requisites for the success of merchant bankers present scenario. 5. MERCHANT BANKING Page 18 . Innovative approach in developing capital market instruments to satisfy the ever changing needs of investing public. trends in stock exchange. Ability to built up the bank-client relationship and live upto the client¶s expectations with total involvement in the project assigned to them. 2. To perform these services effectively the merchant bankers are expected to possess certain qualities. credit syndication etc. The success of the merchant bankers depends on the quality of service and soundness of advice to clients. which are described below : 1. psychology of investing public. 3. management of public issues.

equipment and manpower. MERCHANT BANKING Page 19 . y Infrastructure like adequate office space. y Employment of two persons who has the experience to conduct business of merchant bankers. SEBI has issued revised guidelines on December 22. The criteria for authorization include: y Professional qualification in finance. SEBI issued further guidelines classifying the Merchant Bankers into four categories based on the nature and range of activities and their responsibilities to SEBI investors and issuers of securities. y Capital adequacy y Past track of records. determining financial structure. all merchant bankers will require authorization by SEBI to carry out business. tie.up of financiers and final allotment and refund of subscription and to act in the capacity of managers. experience. In terms of the guidelines issued during April 1990. general reputation and fairness in all transactions.Guidelines for Merchant Bankers: Merchant Bankers have been statutorily brought within the framework of the Securities and Exchange Board of India under SEBI (Merchant Bankers) Regulations. 1992 classifying the activities of Merchant Bankers as follows: The first category consists of Merchant Bankers who carry on any activity of issue management which will inter alia consists of preparation of prospectus and other information relating to the issue. 1992 1. law or business management. 2. portfolio manager and underwriters. advisor or consultant to an issue.

Ordinarily not more than two merchant bankers should be associated as lead managers. But for issues over Rs.50 lakhs. 5. an annual fee and renewal fee may be collected by SEBI. underwriter to an issue or portfolio manager. The third category consists of those authorized to act as underwriter. consultant. All issue must be managed by at least one authorized banker. 4. Second category Rs. An initial authorization fee.20 lakhs and fourth category is nil The above classification was valid up to December 1997 only.manager/ advisor. Each merchant banker is required to furnish to the SEBI half yearly unaudited financial results when required by it with a MERCHANT BANKING Page 20 . 6. third category Rs. advisor or consultant to an issue.The second category consists of those authorized to act in the capacity of co.100 crores and above the number of lead managers may go up to a maximum of four.1 crore. The specific responsibility of each lead manager must be submitted to SEBI prior to the issue. The lead merchant banker holding a certificate under category 1 shall accept a minimum underwriting obligation of 5% of the total underwriting commitment or Rs. Minimum Net worth for first category is Rs. The fourth category consists of Merchant Bankers who act as advisor or consultant to an issue. 25 lakhs whichever is less. 3. functioning as the sole manager or the lead manager.

On the MERCHANT BANKING Page 21 . SEBI has prescribed a code of conduct to the merchant bankers. To ensure transparency and accountability in the operation of merchant bankers and to protect the investors. 9. allotment and refund. 8. indicate that the Board would give reasonable notice to merchant bankers before undertaking inspection. clients and fellow bankers. The regulations. The above guidelines will be administered by SEBI and it will supervise the activities of merchant bankers. 10. 11. 7. The banker must perform his duties with highest standards of integrity and fairness in all his dealings. He will render at all times high standards of service. It has been decided to ask merchant bankers to enter into agreement with corporate body setting out their mutual rights. a number of obligations and responsibilities have been imposed on them. The merchant banker and his personnel will act in an ethical manner in all his dealings with the investors.view to monitor the capital adequacy of the merchant banker. exercise due diligence. It is obligatory on the part of merchant bankers to furnish all the details sought by the investigating team. however. All merchant bankers must adhere to the code of conduct. Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied with and to investigate the complaints from customers. liabilities and obligations relating to a issue particularly on disclosure. SEBI has been vested with power to suspend or cancel the authorisation in case of violation of the guidelines. maintenance of books of accounts and submission of half-yearly reports to SEBI. ensure proper care and exercise independent professional judgement.

In September. the SEBI is empowered to suspend a registration of a member banker in case the merchant banker furnishes wrong or false information. Under the regulation. or price rigging or cornering activities or deterioration in the financial position. the penalty or suspensation or cancellation of registration can be imposed by SEBI only after holding an enquiry and giving sufficient opportunity to the merchant banker of being heard. 1992. the Board is empowered to cancel the registration of the merchant banker. merchant banker. Accordingly only corporate bodies will be allowed to function as merchant bankers. SEBI brought about some major changes in SEBI Rules and Regulations. In case of deliberate manipulation. of the merchant bankers. etc.. the SEBI would advise merchant bankers to take any measures that it may deem fit.basis of inspection report. The notification procedure relating to action to be initiated against merchant banks in case of default has been detailed out. the Board will communicate the contents of the report to the concerned merchant banker to give him/her an opportunity to put forth his/her submissions. the multiple categories of merchant bankers shall be abolished and there will be just one entity viz. Any merchant banker aggrieved by an order of SEBI. and to comply with the provisions of the regulations. The merchant bankers presently functioning as merchant bankers category 2. however. 1997. The regulations empower SEBI to take action against defaulting banker such as suspension/cancellation of registration. On receipt of the explanations. Moreover. 3 and 4 shall have an option to either upgrade themselves as Merchant Bankers or seek separate registration as MERCHANT BANKING Page 22 . can. appeal to the Union Government. if ant. fails to resolve the complaints of the investors.

MERCHANT BANKING Page 23 .50 1. Registrar¶s expenses. in connection with the issue can be reimbursed from its clients. Merchant Bankers Commission As determined by the Finance Ministry.00 (e) Brokerage commission 1. Up to Rs. Excess of Rs.50 On amount subscribed by public 2.50 b. (b) They can charge project appraisal fees. Type of security On amount devolving on underwriters 2. (c) A lead manager an claim a commission of 0. 5 2. Government of India.5%. (d) Underwriting commission. The merchant bankers will be prohibited from carrying out fund based activity other than those related exclusively to the capital markets. (f) Other expenses like advertising. In effect. the activities undertaken by NBFCs such as accepting deposits. 25 crore. Preference shares/debentures a. Equity shares 2.00 lakh 1.2% in excess of Rs. 5 lakh 2. merchant bankers are eligible to charge commission or fees from clients as detailed below: (a) A merchant banker can charge 0.5% up to Rs.underwriters or Portfolio managers under the respective regulations. etc.. stamp duty. leasing and bill discounting would not be allowed to be undertaken by a merchant banker. printing. 25 crore and 0.5% as the maximum as commission for whole of the issue.50 1.

commercial banks. and private firms.. Further. Market makers would also create a market for the scrips by offering two way quotes to the investors. As a result of buoyancy in the capital market in the 1980s some commercial banks set-up their subsidiaries to operate exclusively in merchant banking industry. Resultantly. which could only be achieved through the institution of maker makers. SBI was the first Indian commercial bank and ICICI the first financial institution to make up the activities in 1972 and 1973 respectively. Progress of Merchant Banking in India Up to 1970. all India financial institutions.Merchant Bankers in the Market Making Process The Securities and Exchange Board of India (SEBI) has stated that merchant bankers must be involved more closely in the market making process as share brokers do not have the requisite expertise to evaluate the fundamentals of the scrips before taking over the role of market makers. it was necessary to facilitate greater movement. The SEBI has felt that to ensure liquidity of scrips. along with one merchant banker registered with SEBI could act as a market maker. a number of large stock broking firms and financial consultants also entered into the business. by the end of the 1980s there were 33 merchant bankers belonging to three major segments viz. Merchant banking functions of these institutions was related only to management of new capital issues. MERCHANT BANKING Page 24 . share brokers generally being partnership firms. the SEBI has suggested that any member of the stock exchange. In addition. A minimum of 10 scrips have been proposed by SEBI for the market makers. do not have the financial clout which is necessary for market making activity. there were only two foreign banks which performed merchant banking operations in the country. Thus.

Jardie Fleming. But of this 104 were actually working. Infrastructure Leasing and Financial Services Ltd. IDBI. Goldman Sachs. 1994. MERCHANT BANKING Page 25 . There were 164 Merchant bankers registered as on 31st March. 300 by the end of 199394 and 501 by the end of August. IRBI. All merchant bankers registered with SEBI under four different categories include 50 commercial banks. The number of merchant bankers increased to 115 by the end of 1992-93. are operating in India under authorisation of SEBI. IFCI. etc. 2002. Kleinworth Benson. Morgan Stanley. witnessed an astonishing growth after the process of economic reforms and deregulation of the Indian economy in 1991. Registered Private Public Foreign 904 40 30 164 60 25 19 104 Working In addition to Indian merchant bankers. The chart presents the merchant bankers registered with SEBI classified according to the category. 6 all India financial institutions-ICICI. As a result of proliferation. Indian Merchant Bankers are faced with severe competition not only among themselves but also with the well developed global players.Merchant banking industry which remained almost stagnant and stereotyped for over two decades. Tourism Finance Corporation of India. a large number of reputed merchant bankers like Merill Lynch. and private merchant bankers.

Merchant Bankers International Banks Public Sector Private sector Comercial Banks Financial Institutions State Institutions Banks Finance and Investment Leasing 24 6 4 10 231 Problems of Merchant Bankers: 1. 3. SEBI guidelines has authorized merchant bankers to undertake issue related activities only with an exception of portfolio management.1 crore may have to MERCHANT BANKING Page 26 . Small but professional and specialized merchant bankers who do not have a net worth of Rs. 4.1 crore for authorization of Merchant bankers. These guidelines have made the merchant bankers either to restrict their activities or think of separating their activities from the present ones and float new subsidiary and enlarge the scope of its activities. 2. SEBI guidelines stipulate a minimum net worth of Rs.

1) Growth of New Issues Market The growth of new issue market is unprecedented since 1990-91.operation of the issuing companies in timely allotment of securities and refund of application money is another problem of merchant bankers. the same rose to over Rs. The trend is expected to continue in future. There is a vast scope for merchant bankers to enlarge their operations both in domestic and international market. Scope for merchant banking in india In the present day capital market scenario.closedown their business. corporate sectors and the investors. The number of capital issues has also increased from 516 in 1991-92 to 1.operation of the issuing company to shoulder the responsibility. The amount of annual average of capital issues by non-government public companies was only about 90 crores in the 70s. 2) Entry of foreign Investors An outstanding development in the history of Indian capital market was its opening up in 1992 by allowing foreign institutional investors to invest in primary and secondary market and also permitting Indian companies to directly tap foreign capital through euro issues. Within two years to MERCHANT BANKING Page 27 . specialized professionals into merchant banking business. 1. the merchant banks play the role of an encouraging and supporting force to the entrepreneurs.211 in 2005-06. Non. 12.000 crs in the 80s and further to Rs.700 crores in the first four years of 1990¶s. They have to seek the co. 5. The guidelines have put the responsibility on the merchant bankers. The entry is denied to young.co.

They need the services of merchant bankers to advise them for their investment in India. Experts feel that of the estimated capital issues of Rs. It is estimated that this figure may go up to $ 35-40 billion by the turn of this century. 40. foreign direct investment as also investments by NRIs have risen considerably due to number of incentives offered to them. The increasing number of joint ventures abroad by Indian companies also requires expert services of Merchant Bankers.000 crores in 1994-95. 4) Development Exchange of Debt Market The concept of debt market has to work through National Stock Exchange and the Over the Counter Exchange of India. 3) Changing Policy of Financial Institutions With the changing emphasis in the leading policies of financial institutions from security orientation to project orientation. 5) Innovations in Financial Instruments MERCHANT BANKING Page 28 . The development of the debt market will offer tremendous opportunity to merchant bankers. Further. the total inflow of foreign capital through these routes reached to about $5 billion. corporate enterprises would require the expert services of merchant bankers for project appraisal. a good portion may be raised through debt instruments. financial management etc. the policy of decentralisation and encouragement of small and medium industries will further increase the demand for technical and financial services which can be provided by merchant bankers.March 1994.

7) Disinvestment The government raised Rs. disinvestments and financial restructuring. This is likely to provide good business to merchant bankers in future. The government will sell the shares of identified public sector at any time during the year when they get a good price above minimum stipulated level. splits. structure and functioning. 6) Corporate Restructuring As a result of liberalisation and globalisation the competition in the corporate sector is becoming intense. that the scope of merchant banking is vast and there lies immense opportunities ahead MERCHANT BANKING Page 29 . triple option bonds. cumulative convertible preference shares. deep discount bonds. To survive in the competition. acquisitions. This has further extended the role of merchant bankers as market makers for these instruments. This has led to corporate restructuring including mergers. companies are reviewing their strategies. zero discount bonds. This offer good opportunity to merchant bankers to extend the area of their operations. auction rated debentures etc. floating rate bonds. secured premium notes.The Indian capital market has witnessed innovations in the introduction of financial instruments such as non-convertible debentures with detachable warrants. The government proposes to shift the present method of periodic sale of public sector shares to round the year off loading of shares directly on the stock exchange from the year 1995-96. 2000 crores through disinvestment of equity shares of selected public sector undertakings in 1993-94. The above discussion highlights.

of merchant bankers. MERCHANT BANKING Page 30 . They should develop adequate infrastructure including expertise in order to provide full range of merchant banking services to corporate sector.

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